I am not entirely sure what Cartesian does any more. The NASDAQ-listed company describes itself as “a specialist provider of consulting services and managed solutions for the telecoms, media and technology sector” but that does not tell us what those specialisms are. Previously I was happy to imagine them as an odd couple marriage of two quite different businesses:
- an American consulting outfit that specialized in providing cut-price strategy advice to telcos who cannot afford McKinsey and firms of that calibre; and
- a British business that was mostly concerned with operational integrity and hence offered a mix of products and services associated with the management of project and operating risks.
But now I think their business model is even more confused and confusing than that particular combination would suggest. Perhaps my understanding is wayward, but that just begs the question of why Cartesian cannot do a better job of telling outsiders what they do. And they really need to improve their communication skills; their share price has dropped 62 percent in the last year. Stock market analysts have taken to bashing the management team for failing to return the business to profit.
I listened to a replay of Cartesian’s Q1 earnings call, which was held on March 16th, and I almost felt sorry for the executives who fielded the analyst’s questions. Almost. What sympathy I felt was diluted by my bewilderment that they could not present a coherent strategy for their own company. How can they sell strategy consulting to other firms, and not have a strategy for their own?
Like the analysts, I struggled to see a connection between the disparate successes claimed by Cartesian. So whilst Cartesian has purchased Farncombe, a digital TV consultancy whose main strength appears to lie in security, and they trumpeted the income they have generated from Ascertain, Cartesian’s revenue assurance product, they also said their turnaround depends on converting more of their business into strategic consultancy. This is what CFO John Ferrara said during the call:
Although we’ve had some recent successes in transferring a portion of our revenues from lower margin execution business to higher margin strategy consulting business, we still have more work to do in this area.
This seems to run counter to what CEO Peter Woodward said about their revenue assurance products:
An interesting area to highlight is our revenue assurance offering. Revenue assurance helps customers to manage their revenue streams, while protecting against cost inefficiencies that might threaten margins or topline growth. The revenue assurance market has been mature for several years. We acquired the Ascertain revenue assurance product in 2007 and have several installations currently active in the field.
Today, we are seeing additional revenue assurance interest, although we are able to work with customers to deliver the capability in a more user-friendly format that requires less IT involvement and deployment. As a result, we recently secured two additional clients and others are in the pipeline. These two newest clients are in the deployment stage and should begin to contribute to revenue later in 2016. The margin profile of this business is solid and the business model should add to the consistency we’re seeking to drive.
The gap between strategy consulting and revenue assurance software is about as wide as the Atlantic. This makes me wonder if Cartesian has fallen into the trap of grabbing at any and all revenues it can, whilst pretending this does not undermine the coherence of their business, and hence of the messages presented to customers and investors. Congratulations to Cartesian if they are experiencing growth in the ‘mature’ field of revenue assurance, but that makes me wonder if an essentially profitable software business is being used to subsidize a failing strategy consultancy, and if more shareholder value would be released by splitting them up.
Much of the Q1 results call was bogged down with the discussion of utilization rates. Clearly investors believe that Cartesian is mostly concerned with selling professional services – otherwise known as renting out clever people who give good advice. It would be advantageous to clearly separate the revenues and costs for their software division, to avoid confusion about what the business does and the profitability of each offering. And even if the Ascertain software suite generates a profit it would make sense to sell the software division and to release the value, either to give it back to shareholders or to fund the reorganization needed to generate a sustainable profit from professional services.
Quite a few software firms offer a bit of professional services on the side, to opportunistically top up their margins. However, it is less common for a professional services firm to offer a bit of software on the side. The profitability of software is linked to the ability to gain and retain market share, but Cartesian seems like a business that is dabbling with software whilst focused on professional services, and that is not a good mix.
Certainly the stock market analysts are losing patience, as was evident by their comments…
[The content of this call] seems like it could have almost been copied from what you said two months ago when you did your year-end report, other than the fact that you fell short of your first quarter expectations. So really what actually changed over that period of time relative to the strategy that you announced at that point? And then to what extent is it any more credible now than it was then?
…the alarm bells go off when cash is down at the level where it’s at – the lowest cash balance at the end of the quarter in the 16 years the company has been public.
You’ve now been CEO for 11 months… and it never seems that there is a sense of urgency to move this company forward on a faster basis… Tell me why over the next three quarters life is going to change, since in your first three quarters nothing seems to have improved the bottom line?
And it did not stop there, with hard questions being asked about the amount executives were paid and the extent to which Cartesian needs debt factoring just to generate the cashflow necessary to pay employee salaries.
Making and selling software is essentially different to paying clever guys and gals to give insightful professional advice. Occasionally there are marketing opportunities that can bring both kinds of offering together, but if the software is aimed at the assurance of low-level operations then it will be very hard to find synergies with the kind of consulting work aimed at c-level executives.
As the analysts pointed out, Cartesian is treading water. They have yet to articulate a rational explanation for why such dissimilar business models should be run in parallel by the same management team. My suspicion is that Cartesian’s decidedly unsexy revenue assurance software division is keeping their glamorous but failing strategy consultancy afloat. However, both will be sunk unless they reorganize and find a way to either cut or fix the loss-making parts of their business. You do not need to be from McKinsey to give such straightforward advice, which makes me wonder why Cartesian needs to receive it.